Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Dissertation

Evaluation of the Capital Asset Pricing Model (CAPM) Using Chinese Stock Market Data - Dissertation Example 23). It is worth noting that numerous empirical studies that have conducted in line with evaluating the model have proved to be in harmony with the CAPM principles; nonetheless, some of the similar evaluations have contradicted the model. Therefore, this paper aims at studying if the CAPM principles hold for the China Stock Exchange. Among other things to be included in the analysis, include: i. Whether higher beta results to higher expected returns ii. Whether the zero or average intercept is equal to risk free rate and the SML slope is equal to the average risk premium iii. Whether there is an existence of linearity between the expected returns and the stock beta. The monthly stock returns of some of the firms listed in the Chinese Stock Exchange are used in the analysis. The data was obtained from January 2009 to December 2012; hence, the analysis targets a period of four years. To test the CAPM principles in this stock market, the study will employ the use of approach methods con tributed for by Black, Jensen, and Scholes as per the year 1972; described as the time series test. Additionally, the study shall employ the use of the 1973 Fama and MacBeth cross sectional test. From the analysis of the Chinese Stock exchange data for the period of four year in line with the above methods, it is apparent that this duty did not hold up fully with the CAPM principles. ... Introduction Since the CAPM’s introduction, numerous efforts have since emerged to determine the validity of the principles of the CAPM model. These evaluation studies to determine the validity of the CAPM principles have led to a unique valuable contribution and breakthrough to the global financial economics. Despite these contributions, it is worth noting that some empirical studies to validate the same principles have since differed with application and validity of the CAPM principles and its application in the analysis of the world financial economics (Velasco, 2001; pg. 182). Nonetheless, other studies have proved to be in harmony with the same study. The differences in these studies depicts a significant stimulating factor to the study; hence, calling for a deep enhancement of the CAPM principles in line with evaluating the principles of the model using data from the Chinese Stock Exchange. 1.0.1. Brief Understanding of CAPM The significant contributions of the financial economics theory was realized in the 1960s when numerous researchers including William Sharpe used the Markowitz’s portfolio theory as his ground to develop price formation theory for the financial assets. This price formation theory is what emerged to be known as the Capital Asset Pricing Model (CAPM). It is worth noting that the theory of the Markowitz’s portfolio analyzes the optimization of wealth invest in assets in variation to their risks and returns as well as providing the view on how the underlying risks can be reduced. The CAPM formation or foundation states that investors are in a position to choose to expose their businesses to a reasonable amount risk through a series of combined

Organisational Strategy and Decision Making Essay

Organisational Strategy and Decision Making - Essay Example This is the simplest definition of the term strategy. However in real life, the organization faces a lot of complexity to form & maintain a strategy. (Jeffs, 2008, pp. 13-14) A strategy addresses questions like- What’s the objective of the firm What are the resources of the firm Who are the competitors What strategy are they adopting What pros & cons did they face In which ways our product is separate from theirs Who are our target consumers How to reach them What’s the budget allocated for the promotion of the products The prices fixed are according to the market or not How to know the customer’s preference Through which channels we can promote our products Are we adapting an ethical approach Are we carrying out the Corporate Social Responsibility These questions are never ending. From the questions it’s clear that strategy can be formed to address any issue, be it the launch of a new product, be it a sales promotion effort or be it budget creation. Strat egies ultimately helps the organization in the decision making process. Introduction Strategy formulation depends on the management’s ability & organizations resources. These are the predictable issues which can be answered by forming brilliant strategies. But we should also keep a provision for the uncertainties of the environment. These uncertainties can destroy any good enterprise if the provision to face them is not properly & timely created. The objectives of a firm are the primary guideline for preparing the strategy. These objectives are clearly mentioned in the Vision & Mission Statement of the company. The Mission Statement is a written document where the ideas & thoughts of the company are communicated & the purpose of the firm is clearly defined to the internal & the external stakeholders. This statement helps the managers in the decision of resource allocation & investment. The Vision Statement is a kind of future planning document which states where the company w ants to reach in future. It deals with the questions like what are the company’s upcoming projects, what are their future plans, how are they going to achieve those plans etc. These statements are very useful in the strategy making decision of the firm. (Harrison & St. John, 2009, p 74) The anticipation of the future risks & benefits is termed as SWOT analysis in the language of management. It helps in getting knowledge about the past & thinking about probable solutions to an existing or potential problem. The method involves detailed study of the market, the company & competitors. The analysis includes two parts; the internal environment includes the strength & weaknesses of the company which is controllable by the company itself. The external environment consists of the threats & opportunities which are completely controlled by the outside sources like market & competitors. The product of our choice is British Airways. Company Background British Airways is the largest airli ne company based on sizes of the fleets and the second largest in passenger carriage. It is based near the main hub at London Heathrow Airport is the leading airline in the United Kingdom. Previously The British Airways Board was formed in the year 1971 and the task of the board was to control BOAC and BEA, the two nationalized airline corporations. In 1974, British Airways came into existence with the merger of two state-owned airlines, British